BUSINESS
06/26/2011 11:22 EDT | Updated 08/26/2011 05:12 EDT

TMX Takeover: Crucial Vote Ahead For Toronto Stock Exchange Shareholders, As LSE, Maple Group Await Result

CP

THE CANADIAN PRESS -- TORONTO - Two rival groups seeking to buy the Toronto Stock Exchange are making a final push this week to woo shareholders ahead of a critical vote Thursday that could help decide which bid ends up the winner.

TMX Group (TSX:X) shareholders will decide whether to approve the company's proposed merger with the London Stock Exchange Group. If shareholders reject the LSE deal, it would pave the way for the rival bidder Maple Group Acquisition Corp. to make further shots at winning over shareholders.

The rival bids -- both valued at around $3.7 billion -- will determine the future of Canada's stock market operator, which runs the TSX, the junior Venture Exchange and a growing derivatives business of futures trading that was started and developed by the former Montreal Stock Exchange.

The LSE merger deal would make Canadian exchanges part of a foreign group in a consolidating global industry, but the TSX would still operate independently and be regulated by Canadian securities officials.

The Maple Group deal would effectively cede control of the TSX and affiliates to more than a dozen of Canada's banks, brokerages, insurers and pension funds.

Expect both sides to plead their cases until the eleventh hour.

Maple Group will hold a conference call Monday to answer investor questions in an attempt to sway shareholders to vote against the London deal. Luc Bertrand, the former head of the Montreal Stock Exchange and a major player in the Maple bid, gives a speech about his group's all-Canadian bid to a business group in Toronto on Tuesday.

On Friday, the TMX released a statement continuing to back the London proposal, and taking out full page advertisements in newspapers. Last week, the LSE sweetened its bid in an attempt to lure investors to the all-shares deal, by offering a special dividend of $4 per share. The TMX also promised to continue to pay other dividends -- replacing an earlier plan that would have seen TMX shareholders take a hit.

Rival suitor Maple Group Acquisition Corp., which consists of thirteen of Canada's largest banks, pension funds and other financial companies, responded by increasing its hostile takeover stock and cash offer to $50 per share, up from $48, and increasing the amount of cash available under the proposal.

The LSE bid requires two-thirds approval from shareholders to pass at the June 30 vote, although it -- like the Maple proposal -- still faces regulatory hurdles, including proving to the federal government that the deal would be a "net benefit to Canada." This requirement is what stopped the proposed takeover of Potash Corp. (TSX:POT) by BHP Billiton last year.

The TMX and London Stock Exchange are billing their proposed all-stock deal as a friendly merger of equals, where the London Stock Exchange will own 55 per cent of the new entity, and TMX Group shareholders will own the remaining 45 per cent.

Both sides have their supporters. Two advisory services recommend shareholders vote in favour of the LSE merger, citing the increased debt the Maple deal would saddle the company with as well as regulatory concerns.

On Friday, the Maple proposal received the stamp of approval from investment guru Stephen Jarislowsky, who was one of the key forces in organizing support against the BHP Billiton hostile takeover offer for Potash Corp.

But cash is ultimately king, and the Maple Group proposal offers more of it, say industry experts.

Mike Bignell, the president and CCO of competing stock exchange Omega ATS called the LSE-Maple bidding war one of the "bloodiest" voting battles Canada has seen, and adds that since investors tend to go for cash in hand, they will likely reject the LSE's stock-only deal.

"If people are looking for instant gratification, certainly the Maple Group is the offer to take, and if people want to stay invested in this corporation and own a chunk of a company with an international scope then they need to vote in favour of (the LSE) deal," he said.

The London Exchange has promoted its offer as one that allows the Toronto Stock Exchange to reach more potential money from around the world, but some experts say the TSX attracts top global resources companies on its own.

John O'Connell, CEO of wealth manager Davis Rea Ltd., said he thinks the Maple bid will win because the TSX has not persuaded shareholders that the LSE proposal is beneficial.

"I think the TSX brings more to the LSE than vice-versa," he said, citing Toronto's successful venture exchange and London's failed equivalent.

"Canada doesn't seem to be having any problems attracting money from the world. In fact, by the strength of the Canadian dollar, it's pretty evident that foreign investors are coming to Canada in a pretty major way."

If shareholders ultimately reject the London Exchange deal, or the TMX delays the vote, it doesn't automatically mean the Maple Group bid will end up the winner, says Tom Caldwell, chairman Caldwell Securities & Urbana Corp. (TSX:URB), Toronto-based investment companies. He is a TMX shareholder, a financial adviser, and also has a company listed on the exchange.

"There can be three answers to this -- LSE, Maple or nothing," he said, adding that getting two thirds approval is a large requirement.

He said that regulators need to take a look at the proposed structure of the TSX if Maple -- which is made up mostly of banks -- does end up winning shareholder approval. Bignell said banks could end up getting substantial fees from nearly all investment activities in Canada if the Maple deal is approved.

"Maybe somebody at the regulatory world might wake up and say 'wait a second here, do we want this pricing mechanism absorbed into a very narrow-vested interest cartel?,'" Caldwell said.